Edited version of your written advice

Authorisation Number: 1051455705179

Date of advice: 20 November 2018

Ruling

Subject: GST and supply of digital product

Question 1

Are you making a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) regarding the payment you received from the overseas company under the Agreement?

Answer

No, you are not making a taxable supply under section 9-5 of the GST Act regarding the payment you received from the overseas company under the Agreement. The supply of digital product game is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

Relevant facts

You are an Australian company and registered for the goods and services tax (GST).

You develop digital product for online digital sale. There is no physical stock item produced.

You have entered into an Agreement with an overseas company. Under the agreement the overseas company will market and distribute your product for sale.

When the digital product is developed you submit it to the overseas company which is then uploaded on a website for sale worldwide. You decide the price for the digital product and the overseas company will remit monthly payment to you.

The overseas company will appoint entities to sell the digital product and the latter will make the sale under their name, enter into contract with end users and collect the payment.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

Reasons for decision

Note: Where the term ‘Australia’ is used in this document, it is referring to the ‘indirect tax zone’ as defined in section 195-1 of the GST Act.

Detailed reasoning

Before we determine whether you are liable for GST regarding the payments received we need to determine the character of your supply.

Characterisation of supply

You develop digital product and make them available to the overseas company for marketing and distribution to its appointed entities who will sell the digital product under their own name online.

In this instance we consider you supply your digital product to the overseas company. The next step is to consider the GST status of your supply of digital product.

GST status of your supply of digital product

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

a. the supplier makes the supply for consideration; and

b. the supply is made in the course or furtherance of an enterprise that the supplier carries on; and

c. the supply is connected with Australia; and

d. the supplier is registered or required to be registered for GST.

However the supply is not a taxable supply to the extent that it is GST-free or input taxed.

All of the above must be satisfied for your supply of digital product to be a taxable supply.

From the information given, your supply of digital product satisfies paragraphs (a) to (d) of section 9-5 of the GST Act as:

a) you make your supply for consideration; and

b) the supply is made in the course of a business that you carry on; and

c) your supply is connected with Australia as it is made through a business that you carry on in Australia; and

d) you are registered for GST.

However, your supply of digital product is not a taxable supply to the extent that it is GST-free or input taxed.

There is no provision under the GST Act that makes your supply of digital product input taxed.

GST-free supply

Relevant to your supply of digital product is item 2 in the table in subsection 38-190(1) of GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and:

a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or

b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST.

Only one of the paragraphs in item 2 needs to be satisfied.

Paragraph (a) of item 2

From the facts given, your supply of digital product satisfies paragraph (a) of item 2 as:

● your supply of digital product is made to a non-resident who is not in Australia in relation to your supply when the supply is done; and

● your supply of digital product is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia.

However, paragraph (a) of item 2 is limited by subsection 38-190(3) of the GST Act. There is no need to consider paragraph (b) as paragraph (a) is satisfied.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table is not GST-free if:

a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

b) the supply is provided or the agreement requires it to be provided to another entity in Australia; and

c) for a supply other than an input taxed supply – none of the following applies:

i. the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

ii. the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

iii. the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient’s acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

From the facts given, subsection 38-190(3) of the GST Act does not apply to your supply of digital product as you are making and providing your supply to Nintendo Japan under the Agreement.

Your supply of digital product is therefore GST-free under item 2.